Problem 18-15 (a) (LO. 4) Quentin, Tara and Tito form a business entity with eac
ID: 2573293 • Letter: P
Question
Problem 18-15 (a) (LO. 4)
Quentin, Tara and Tito form a business entity with each contributing the following.
Their ownership percentages will be as follows.
Tara’s land has a $30,000 mortgage that is assumed by the entity. Tito is an attorney who receives her ownership interest in exchange for legal services. Determine the recognized gain to the owners, the basis for their ownership interests, and the entity’s basis for its assets if the entity is organized as:
If an amount is zero, enter "0".
a. Entity: Partnership.
b. Entity: C corporation.
c. Entity: S corporation.
AdjustedBasis Fair Market
Value Quentin: Cash $220,000 $220,000 Tara: Land $55,000 90,000 Tito: Services 60,000
Explanation / Answer
a. As per section section 721 no gain or loss is recognized subsequent to contribution of property by the partners to a partnership. As such neither Quentin nor Tara have any recognized gain. Because Tito is contributing services rather than property in exchange for ownership interest he has a recognised gain of $ 60,000
Section 722 provides for a carryover basis for the partners. The $30,000 mortgage assumed by the partnership results in the below adjustments. Hence the partner's bases for the partnership interests are computed as follows
Quentin ($220,000+$12,000) $232,000
Tara ($55,000-$30,000+$12,000) $ 37,000
Tito ($60,000+$6,000) $ 66,000
Section 723 provides for a carryover basis for the partnership's assets.
Cash $220,000
Land $90,000
Organization costs $ 60,000*
*Assuming the legal costs relate to the organization of the partnership, they have to be capitalized.
b. Section 351 provides that no gain or loss is recognized subsequent to contribution of property to a corporation if the shareholders contributing the property control (i.e at least 80%) the corporation immediately after the transfer. Since the cumulative ownership of Quentin and Tara(40%+40%=80%) satisfies this requirement neither Quentin nor Tara has any recognized gain. Since Tito is contributing services rather property in exchange for an ownership interest he has a recognised gain of $60,000.
Section 358 provides for a carryover basis for the shareholders. Thus the shareholders basis for the stock is as follows :
Quentin $220,000
Tara ($55,000-$30,000) $ 25,000
Tito $ 60,000
Section 362 provides for a carryover basis for the corporate assets.
Cash $220,000
Land $ 90,000
Organization Costs $ 60,000*
Assuming the legal costs relate to the organization of the corporation they have to be capitalized.
C. Same tax consequences as in b above since an S corporation is a corporation.